PLEASE NOTE: I HAVE PERMANENTLY MOVED MY BLOG TO http://www.rationalsurvivability.com/blog

January 15, 2008

I'm feeling old lately. First it was my visceral reaction to the paranormal super-poking goings-on on Facebook and now it's this news regarding Linden Lab's Second Life that has my head spinning.

It seems that the intersection between the virtual and physical worlds is continuing to inch ever closer.

In fact, it's hitting people where it really counts, their (virtual) wallets.

We first saw something like this bubble up with in-world gambling issues and now Linden announced in their blog today that any virtual "in-world banks" must be registered with real-world financial/banking regulatory agencies:

As of January 22, 2008, it will be prohibited to offer interest or
any direct return on an investment (whether in L$ or other currency)
from any object, such as an ATM, located in Second Life, without proof
of an applicable government registration statement or financial
institution charter. We’re implementing this policy after reviewing
Resident complaints, banking activities, and the law, and we’re doing
it to protect our Residents and the integrity of our economy.

Since the collapse of Ginko Financial in August 2007, Linden Lab has
received complaints about several in-world “banks” defaulting on their
promises. These banks often promise unusually high rates of L$ return,
reaching 20, 40, or even 60 percent annualized.

Usually, we don’t step in the middle of Resident-to-Resident conduct
– letting Residents decide how to act, live, or play in Second Life.

But these “banks” have brought unique and substantial risks to
Second Life, and we feel it’s our duty to step in. Offering
unsustainably high interest rates, they are in most cases doomed to
collapse – leaving upset “depositors” with nothing to show for their
investments. As these activities grow, they become more likely to lead
to destabilization of the virtual economy. At least as important, the
legal and regulatory framework of these non-chartered, unregistered
banks is unclear, i.e., what their duties are when they offer
“interest” or “investments.”

There is no workable alternative. The so-called banks are not
operated, overseen or insured by Linden Lab, nor can we predict which
will fail or when. And Linden Lab isn’t, and can’t start acting as, a
banking regulator.

Some may argue that Residents who deposit L$ with these “banks” must
know they’re assuming a big risk – the high interest rates promised
aren’t guaranteed, and the banks aren’t overseen by Linden Lab or
anyone else. That may be true. But for all of the other reasons we’ve
set out above, we can’t let this activity continue.

Thus, as we did in the past with gambling, as of January 22, 2008 we will begin removing
any virtual ATMs or other objects that facilitate the operation or
facilitation of in-world “banking,” i.e., the offering of interest or a
rate of return on L$ invested or deposited. We ask that between now and
then, those who operate these “banks” settle up on any promises they
have made to other Residents and, of course, honor valid withdrawals.
After that date, we may sanction those who continue to offer these
services with suspension, termination of accounts, and loss of land.

This was inevitable, given the ever-growing connections between the
virtual economy of Second Life and the real-world economy. In-world
Linden Dollars are exchangeable for real-world dollars, so financial
crime in Second Life can make you rich in the real world. Linden
doesn’t have the processes in place to license “banks” or investigate
problems. Nor does it have the enforcement muscle to put bad guys in
jail.

Expect this trend to continue. As virtual world “games” are played for
higher and higher stakes, the regulatory power of national governments
will look more and more necessary.

So far I've stayed away from Second Life; I've got enough to manage in my First one. Perhaps it's time to take a peek and see what all the fuss is about?